Will USD/MXN lose the ground?

The Mexican Peso is overperforming not only the currency exchange sector but also emerging markets assets. While Argentine Peso, Turkish Lira and Russian Rouble struggle to converge with the carry-trade speculative flows, Mexican Peso is gaining strength versus the US dollar. Traders and investors wonder, is that a temporary factor or just a beginning of a strong long-term trend? Will USD/MXN break through the technical bottom and accelerate the plunge, or should we see a deep retracement if not a reversal? This article is aimed to answer those questions, as well as assess vital technical levels for the USD/MXN currency pair for the nearest future.

First of all, we should understand the theoretical background of such a strong bearish rally. USD/MXN dropped almost 9% in 5 months, while a decline of 3.5% was noticed in April only. Several fundamental reasons explain that impressive price action. First, the US Federal Reserve is definitely on pause. The FOMC decision has stopped the tightening cycle, and political pressure did not prevent the regulator’s independence. Several voting members spoke recently, FOMC meeting minutes were published, Fed Chair Powell is confident about no rate hike this year at least the US economy will boost the expansion suddenly. So far, there are no signs for such a surprise as many macroeconomic reports remained mixed and uncertain. As a result, the fixed-income market faced a significant capital outflow, US 10-year Treasury yields dropped, while investors started seeking more attractive markets to invest in.

Second, the speculative capital inflow in emerging markets hits record-high levels this year. Despite the global economic slowdown, trade wars and consumption concerns, investors are keen on the risk appetite. Global stock indices kept climbing north, US benchmarks approached to all-time high levels, charting the full recovery from the October’s crash. Even cryptocurrencies printed a sudden bullish rally with a dramatic jump in the market cap and trading volume.

Third, WTI Crude Oil price is in the uptrend. US weekly inventories were surprisingly strong recently, showing that the demand might not be at such high levels as it was widely anticipated previously. Electric cars sales hit the record. However, all that does not stop oil speculators from lifting the price of the black gold. Technically speaking, WTI Crude might accelerate the growth if the crucial level of $65 per barrel was breached. OPEC does not seem to increase the overall oil output significantly as the current level of prices is comfortable for global exporters. Mexican Peso is traditionally vulnerable to WTI Cure price fluctuations, and the recent uptrend has been reflected in USD/MXN.

From the technical analysis point of view, USD/MXN has charted a large descending triangle on the daily chart below. The base of the triangle is placed at 16.4557; the lowest daily close rate charted on August 7 2018. The workout depth of the triangle is more than 2000 pips (four digits quotes). The pair continued charting lower lows, which confirms the downtrend. Ichimoku Cloud trend indicator became extremely bearish when USD/MXN failed to hold gains inside the span, falling out on the downside. All of Ichimoku’s lines are placed in the right order to proceed with the bearish action. Besides, the latest bullish rebound was limited by Conversion Line, which worked as the resistance. As a conclusion, a test of the blue horizontal static support is unavoidable for the nearest future. Moreover, if the bears were able to breach the defensive barrier, then we might see USD/MXN losing the ground and falling sharply further.

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